Individual Retirement Accounts or IRAs have been around somewhat longer than 401(k) plans and remain a sound investment vehicle for retirement savings. There are plenty of reasons why an IRA is a good investment.
No Pension or 401(k) is available to you.
Your employer may not offer a 401(k) plan, and you may not be eligible for a pension from an employer or union. Even if Social Security remains intact and viable, the low monthly income it provides will never replace your income or give you the independent lifestyle and secure retirement you need and deserve. Anybody with income can open an IRA through a bank, a financial advisor, or even online.
Contributions to an IRA savings account are capped at $5000 annually, so it will not be equal to the income you could receive from a 401(k).plan as contributions to 401(k) plans allow contributions of up to $16,000 per year for the current year. Still an IRA account is a reasonable means to supplement Social Security, a company pension and a 401(k) plan as well. If the IRA is opened early in one’s career and with contributions made faithfully every payday, it could easily become a retirement investment vehicle by itself.
You can also Save on Your Income Tax before Retirement
IRA contributions can be made up until April 15 or when you file your taxes for the previous calendar year. This allows you to take a look at your tax bracket and your available savings well-after the income was earned. It is then easier for you to determine if deferring the taxes on an IRA contribution would benefit you by lowering your tax bracket while also giving you a much better idea of how much you can afford to contribute. With a 401(k) you are generally making contributions every pay period as your income is earned, so if you stow away too much you are stuck with your decision or required to pay a penalty to get it back. You can also contribute weekly or periodically to an IRA with automatic payments, but you have can choose to hold onto your money for many months before you decide if you want to invest it in an IRA or not.
As with the 401(k), you can choose between a tradition pre-tax IRA and post-tax Roth IRA. With the Roth plan, your contributions will not be tax deductible, but your withdrawals in retirement will be tax free ? for both the amount you contributed and the earnings. The Roth IRA also allows you to withdraw the amount of your contributions without penalty at any time, although earnings would incur tax and penalty if withdrawn early without a qualified exemption, such as payment of non-reimbursed medical bills or a down payment on your first home. The added flexibility of investing money now that has already been taxed along with the tax-free qualified withdrawals later on has some distinct advantages, but you still need to determine if that flexibility and deferred savings is worth giving up the immediate tax savings of the traditional IRA.
Strategic planning for retirement ensures that the golden years you so much anticipated will be worry free, independent and secure. No matter your current financial situation there is good retirement plan for you. Understand and use the tax advantages the government offers in setting up the ideal plan for your financial future.
For those who found interest in the previous piece, you can go and look at other related articles or reviews at Financial Advisor Matt Golba or this other Matt Golba Wealth Management page.